5 Sweet Tax Breaks For Students

"...The American Opportunity credit can only be claimed for up to four years per student, but there's no limit on how long families can claim the Lifetime Learning Credit. The catch is that you'll have to spend more to get the full benefit. Unlike the American Opportunity credit, which provides a dollar-for-dollar tax match for the first $2,000 families spend, the Lifetime Learning incentive only provides a credit equivalent of 20 cents for every educational dollar families spend up to $10,000. That's a maximum tax credit of $2,000 annually for $10,000 spent on tuition fees and supplies. The income restrictions are also a bit different. The Lifetime Learning tax credit is available in full for single filers earning $53,000 or less ($107,000 for joint filers). Partial credit is available for single filers with incomes below $63,000 ($127,000 for married couples).

'[Tax credits] are a financial benefit, but you don't get it at the time your tuition bill is due,' explains Karen McCarthy, a policy analyst for [NASFAA]. 'You pay during the year and then the following year when you're filing your taxes, that's when you claim the tax credit. …The timing is a little bit out of sync.'

The Lifetime Learning credit is nonrefundable, meaning that it's only available to those earning enough to file an income tax return. ...

The federal government offers tax-free growth on funds in a 529 prepaid or college savings plan, but many states also offer their own incentives, though these differ quite a bit from state to state, says Karen McCarthy.

Alabama, for example, offers a deduction of up to $10,000 for joint filers, while Illinois offers a walloping $20,000 deduction for married couples annually. If you have a 529 plan and are unsure of whether your state offers a tax incentive, a simple call before tax time could help pad your wallet."

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